The allegation that Sicily's Cosa Nostra helped finance the project was made in a Palermo court by Massimo Ciancimino, the son of a Mafia don who was close to the head of the Sicilian mafia's "boss of bosses", Bernardo Provenzano.

He claimed in court his father, Vito Ciancimino, along with two Mafiosi connected to the building industry, invested "dirty money" through front companies into Mr Berlusconi's sprawling housing estate on the edge of Milan.

There has been intense speculation as to how the young Mr Berlusconi, who came from a modest middle class family, raised the capital to fund the construction of the ambitious apartment complex, known as Milano 2, which included lakes, tennis courts, schools and shops.

Mr Ciancimino told the court: "My father diversified his investments to evade anti-Mafia investigators. He considered the Milan megaproject a bit pharaonic and he was hesitant, but then he decided to participate through various companies.

Mr Berlusconi's lawyer, Niccolo Ghedini, categorically denied the claim that the Italian prime minister had ever accepted Mafia money and said he would sue Massimo Ciancimino for defamation.

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"All the flows of investment into Milano 2 were transparent and they've been subject to scrutiny many times," said Mr Ghedini.

The profit Mr Berlusconi accrued from Milano 2 catapulted set him on course to become one of Italy's richest men.

Mr Ciancimino was testifying in the trial of a senior Carabinieri police officer who is accused of giving protection to Provenzano and helping him evade capture, amid long-held suspicions that the Italian state struck a "truce" with mobsters which lasted for decades.

Provenzano was finally arrested in April 2006 in a run-down shepherd's shack outside Corleone, after being on the run for an extraordinary 43 years.

The elder Ciancimino was born in Corleone, the Mafia stronghold in the mountainous interior of Sicily that was made famous by The Godfather films.